Edited version of private advice

Authorisation Number: 1051747074732

Date of advice: 9 September 2020

Ruling

Subject: Debt and equity

Question 1:

Will the Commissioner make a determination that each drawdown in the debt facility provided by Company A be characterised as an equity interest for the purposes of section 974-70 of the Income Tax Assessment Act 1997 (ITAA 1997) because of the application of section 974-80 of the ITAA 1997?

Answer:

Yes

Question 2

Will the taxation of financial arrangement provisions in Division 230 of the ITAA 1997 apply to the gains and losses arising from the debt facility provided by Company A?

Answer:

No

This ruling applies for the following period:

1 July 2020 - 30 June 2021

The scheme commences on:

1 July 2020

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company B is undertaking a Project.

Funding for part of the cost of the Project is obtained from a debt facility with Company A.

The debt facility is a multiple-draw cash advance facility.

The terms of the debt facility are specified in an agreement between Company A as Lender and Company B as Borrower.

Company A is subject to the Taxation of Financial Arrangements (TOFA) rules in Division 230 of the ITAA 1997.

Company A will not make an election under the TOFA rules to account for its gains or losses from financial arrangements for income tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 230-40

Income Tax Assessment Act 1997 subsection 230-40(1)

Income Tax Assessment Act 1997 section 230-45

Income Tax Assessment Act 1997 section 230-50

Income Tax Assessment Act 1997 section 974-15

Income Tax Assessment Act 1997 subsection 974-15(1)

Income Tax Assessment Act 1997 section 974-20

Income Tax Assessment Act 1997 section 974-30

Income Tax Assessment Act 1997 section 974-35

Income Tax Assessment Act 1997 section 974-70

Income Tax Assessment Act 1997 subsection 974-70(1)

Income Tax Assessment Act 1997 section 974-74

Income Tax Assessment Act 1997 section 974-80

Reasons for decision

Question 1:

Summary:

Each drawdown in the debt facility is a debt interest and section 974-80 applies to treat the debt interest as an equity interest.

Detailed reasoning

On the facts each drawdown in the debt facility is a debt interest as it satisfies the requirements in subsection 974-20(1) and subsection 974-80(2) applies to treat the debt interest as an equity interest.

Question 2:

Summary:

Gains or losses made by Company A from the drawdowns under the debt facility are not subject to the TOFA provisions.

Detailed reasoning

The drawdowns in the debt facility is an equity interest under subsection 230-50(1). In accordance with Taxation Determination TD 2011/12 Income tax: where an equity interest is a financial arrangement which satisfies both subsections 230-45(1) and 230-50(1) of the Income Tax Assessment Act 1997, which provision applies?, Company A can elect to apply the hedging financial arrangements method if it satisfies certain requirements.

As Company A will not make such an election, any gains or losses it made under the debt facility are not subject to the TOFA rules.

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